Question

manufacturing by U.S. factories and coal power plants in the northeastern states causes acid rain that falls on Canadian soil. This acid rain has put Canadian forests and lakes in danger.

This situation constitutes a negative externality because:

	a. U.S. factories and coal power plants do not consider only their private costs in their decision making
	b. U.S. factories and coal power plants consider only their external costs in their decision making
	c. U.S. factories and coal power plants consider only their private costs in their decision making
	d. U.S. factories and coal power plants consider only external costs of their operations

If U.S. factories and coal power plant were to internalize this externality, U.S. factories and coal power plants would produce (less, more, the same ) as the (private costs would increase, external costs would increase, total costs would increase, social costs would increase..)

Answer 1

Ans) Negative externality is when the bystander bears the cost of any activity. In case of negative externality, social cost is more than the private cost. And since firms only consider their private cost and not the external cost, goods are overproduced.

To internalise this externality, government imposes tax equal to the external cost. This reduces the quantity and brings it equal to the socially optimal quantity.

1) Option c.

2) Firm will produce less quantity to internalise the externality, as social cost will increase.